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‘Bank rules are driving mortgage lenders into high risk areas’

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The building society sector is poised on the brink of huge change this year, with regulation increasingly driving the lenders into non-traditional areas.

Several building societies have either announced plans or are considering moves into areas such as regulated and unregulated bridging, larger loans, and interest-only.

Building Societies Association head of mortgage policy Paul Broadhead says: “I’ve had discussions over the last couple of years with a few building societies, who think there is an opportunity for interest-only as the Mortgage Market Review settles down and lenders work out where demand is.

“We’ve also seen some of the smaller ones look at lifetime mortgages, and I suspect we’ll see more of that.”

The changing focus is being partly driven by a relaxation of Prudential Regulation Authority rules.

Dudley Building Society chief executive Jeremy Wood says the new rules free building societies to look more at new areas.

He says: “The old limits that applied in the Building Society Sourcebook were looking fairly outdated, and many building societies were proving that they could operate in markets that didn’t need the restrictions that the old Sourcebook placed upon us.”

Broadhead also thinks the new PRA rules will encourage building societies to diversify.

He says: “Now is the opportunity for them to start having a look at their corporate plans for the next five years about what they’ll do, because if they don’t review their business model it becomes redundant pretty quickly.”

The second reason driving the change in focus by building societies are the Bank of England rules around capital adequacy, according to John Charcol senior technical manager Ray Boulger.

He says: “The reason these building societies are prepared to look at some of these higher-risk areas is because they have been driven there by the regulator.

“Although the Bank of England has said it will amend the capital adequacy requirements for smaller lenders, the reason most building societies, and all the smaller ones, can’t compete in the low loan-to-value market is the capital they have to hold against low-risk loans is significantly higher than the capital that has to be held by the larger lenders, and they simply can’t compete.”

Broadhead says: “Building societies are innovative and shouldn’t be seen as museum pieces. Sometimes the consumer, and the industry, perception of building societies is unfairly sepia tinted. Building societies can’t sit still.”

But building societies should be wary of moving too quickly, Boulger adds.

He says: “For any lender, the key thing is to make sure that, if you’re going into a new area, you understand it and you have underwriters that understand it. Clearly the smaller you are as a lender, the more risk there is if you go into new areas and get it wrong. It will have a disproportionate effect on your balance sheet.”

The Family Building Society director of business development Keith Barber says: “Everybody has to embrace change. If you carry on doing what you’ve always done, you’re providing a service to a dying market.”

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